Retirement Heresy

Is conventional financial planning good for your financial health? Before you automatically respond, Yes, of course it is, and angrily turn the page, seriously consider that provocative question for a moment. That was the name of a study published last winter by Laurence Kotlikoff, a professor of Economics at Boston University. You can probably guess what his answer was. Indeed, it was a well, when

Is conventional financial planning good for your financial health? Before you automatically respond, “Yes, of course it is,” and angrily turn the page, seriously consider that provocative question for a moment. That was the name of a study published last winter by Laurence Kotlikoff, a professor of Economics at Boston University. You can probably guess what his answer was.

Indeed, it was a “no,” — well, when it comes to retirement and insurance anyway. Larry Kotlikoff argues, somewhat iconoclastically, that the financial-securities industry induces too many Americans to live as misers, squandering their youth so that they can live large in retirement. That's right: Kotlikoff has studied retirement and insurance calculators online, and says you guys do it all wrong. Your algorithms are crude, your advice is too dire. It's one giant scare campaign that doesn't really help consumers. (It helps financial-services firms, he says, who love to earn the fees on invested assets.) In general, you are telling them to save too much, and to invest too aggressively to reach goals that are unattainable. He also acknowledges, not surprisingly, that untold households aren't saving enough, but in any case advisors aren't using sophisticated enough analysis. He says that you need to think like an economist, and learn the concept of “consumption smoothing,” a theory introduced 70-some years ago by Irving Fisher, one of the first celebrity economists (although Fisher's reputation suffered when his call on the Great Depression proved wrong).

Kotlikoff's point is that you need to use his financial software (download it from his website, esplanner.com, for $149 per copy). Well, it's that, and savers should realize that they need to arrive at a sustainable standard of living and save around that. Sometimes that means saving less (a daughter's wedding, a son's private school tuition, a down payment for a house), and then saving more at other times. “The message of the industry is, ‘Buy our product, stupid, buy our products independent of what you really need,’” he told me. “‘Let us help you fantasize about your needs that are way out of balance with your realities, and then let's see if we can sell you stuff to meet those needs — which are far too high.’”

So, your replacement-rate methodology is “stupid,” and saving to create a 75- percent income-replacement rate in retirement would “involve starvation” (to say nothing of the cost of buying life insurance and long-term care insurance) for most people. In short, your crude process can force people into saving five times too much for retirement, and buying five times too much insurance. “There is a major risk to over-saving and over-insuring, which is that you may not live or you may not die,” he says.

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